Is it Time to Buy Costco Stock?

Costco NASDAQ: COST likely isn’t the first name to come to mind when you think of pandemic winners, but the warehouse club’s shares soared 28.2% in 2020 as people stocked up on food and household goods. Costco just completed its third consecutive quarter with 12%+ yoy revenue growth; the company hadn’t done that since 2008.

But 2021 has been a different story. Shares are down 17.3% YTD and have dipped 12 of the last 13 sessions. Investors are clearly concerned that Costco’s growth rates will slow in a post-COVID world. Is that concern justified?

Fiscal Second-Quarter Earnings Were Mixed

Costco reported its fiscal Q2 2021 earnings (the period ending December 31, 2020) on March 4 after the bell. Here were some of the highlights:

• EPS of $2.14 a share was higher than the $2.10 a share reported in the year-ago period, but lower than the $2.45 a share that analysts were expecting.
• Revenue went up 14.7% yoy to $44.7 billion, coming in above analyst estimates of $43.75 billion.
• Same-store sales increased 12.9% yoy, excluding fluctuations in gasoline and foreign currency exchange.
• E-commerce sales jumped 74.8% yoy.
• Membership fees rose 8% yoy to $881 million.

Let’s start by looking at the lower-than-expected earnings. Costco has mostly benefited from the pandemic, but it hasn’t been all good for Costco. The warehouse club incurred 41 cents a share in largely pandemic-related costs last quarter. Without those costs, Costco would have beat on the bottom-line.

Since the onset of the pandemic, many shoppers have made fewer trips, but spent more each time. They have shopped in this way to limit their exposure to COVID. Costco customers, however, have spent more on each trip to the warehouse and gone more often. Average shopper transactions were up 9% in the US market and shopping frequency was up 2.7%.

Membership fees are increasing because Costco is both retaining existing customers and acquiring new ones. On the Q2 earnings call, CFO Richard Galanti said, “In terms of renewal rates, the U.S. and Canadian renewal rate came in at 91% as of Q2 end. This was up 0.1% from the 90.9% at the end of the prior fiscal quarter.”

He added, “In terms of households at Q2 end, we came in at 59.7 million, up from 59.1 million 12 weeks earlier; and total cardholders 108.3 million, up from 107.1 million 12 weeks earlier.”

Costco’s underlying metrics indicate that the company is set for post-pandemic prosperity, even if growth rates slow a few percentage points.

What About the Minimum Wage Increase?

A couple of weeks ago, Costco announced that it is raising its minimum wage to $16 an hour. The stock fell in response, as investors never want to sell voluntary wage increases.

But here’s the deal:

With the Democrats in control, it seems like it’s only a matter of time before a $15 an hour federal minimum wage is implemented. Costco is adding just $1 on top of that, hardly a difference-maker to the bottom-line, but positive for PR.

Valuation and Dividend Are Attractive

Costco shares looked a little expensive at the end of 2020, but the recent pullback has taken the valuation down to 31.5x forward earnings. That may look a little steep, but it’s very reasonable for a company that is seeing double-digit revenue growth and has strong underlying metrics.

The dividend is just 0.90%, but with a payout ratio of 28%, it is likely to increase considerably in the coming years. And Costco has been very generous with special dividends. In December, Costco paid its shareholders a $10 per share holiday bonus, the fourth time in the last eight years that the warehouse club has paid a special dividend.

How Should You Play Costco?

Costco shares have been on quite a losing streak.

But now may be a good time to get in as:

• The RSI is well into oversold territory.
• The stock put in a reversal Friday.
• Shares traded into Friday’s range yesterday.

If you get in now, you could put a stop a little under Friday’s lows, which would give you a downside of less than 2%. It would be an excellent time to get into a long-term winner at a discount.